One of the most significant financial benefits of owning a home is the tax deduction you can take from the interest paid on your mortgage and the property tax paid on your home. You may be wondering exactly how much of a tax saving this is – are we talking a couple of hundred dollars or a couple of thousand? For a rough calculation of this tax savings:
Calculate the Total Deduction
- Ask your lender what your total mortgage interest will be for the first full year of your loan.
- Ask your real estate agent what your property taxes will be on the property for the first full year of your loan.
- Add the total mortgage interest and property taxes together to get your total deduction.
For example: $15,500 (Interest) + 4,000 (Taxes) = $19,500 (Total Deduction)
Calculate the Exact Tax Savings
- Determine your marginal tax bracket. For our example, we will use 28%.
- Take your total deduction from above and multiply it by your tax bracket percentage.
For example: $19,500 (Total Deduction) X 28% (Tax Bracket) = $5,460 (Tax Savings)
What this Means
You will pay $5,460 less in federal taxes that first year of your mortgage. Continue as you are with your withholding and receive this as hefty tax return check. Or, if you would like to translate this amount into a tangible monthly savings, divide the $5,460 by 12 for a dollar figure of $455. Ask your employer to reduce your federal withholding by this $455, thus increasing your monthly take-home pay. Many homeowners will use this amount to offset their monthly mortgage payment, making the monthly cost of owning a home a bit easier to swallow.
Things to Note
In the calculation above, we used your current marginal tax bracket. If your income increases, you may fall into a lower tax bracket, therefore decreasing the amount of your tax savings.
Additionally, as time goes by, you will be paying less interest each month on your mortgage (assuming you have a standard amortized mortgage). This will also decrease the amount of tax savings as the years go on.